Investment Company or Trading

[MANHAR]

Hi

Could someone with greater property taxation knowledge please help with the following:

A client with a significant property portfolio transferred 4 properties held by him and his wife into a newly set up close limited company last year. These were all commercial properties on which two have an option to tax for VAT and two do not. The relevant stamp duty was paid although there was no CGT on the transfers.

The properties are all rented out through agents who receive the rent, deduct their commission and any expenditure then pass the balance to the limited company.

My questions are:

1) Am I right in thinking that this would be classed as an Investment Company for corporation tax purposes as the CT600 asks whether the company is trading or Investment ?

2) Would the rate of corporation tax be the normal corporation tax rate for a small company of 20% (2016/17) ?


Thanks in advance for your help.

Manhar

[SteLacca]

On the face of it, based on the very bare facts provided, I would say investment. However, the question has confounded the Tribunals on several occasions, and with (much) more information a different conclusion could be reached.

Whilst I suspect none will be met, and given that tribunals have said that they are not an exhaustive test, have you considered whether the badges of trade are matched.

Further, particularly with property, intent may have a lot to do with it. If the properties are purchased purely for letting purposes, and those lets are not actively managed, this would also point to investment.

However, if the purchase includes plans to renovate or convert, and to re-sell at a profit, then the waters become much muddier.

At this stage, it is unlikely to make much of a difference (the CT rate is the same, regardless), but get it right now, since it can make a significant difference to the exit strategy.

[bd6759]

All close companies are close investment holding companies unless they exisit for a permiited purpose.

One such permitted purpose is making investments in land, or estates or interests in land, in cases where the land is, or is intended to be, let commercially. And any letting of land is taken to be commercial unless the let is to a connected person or a relative of a conencted person.

On the bare facts given, this not a close a close investment holding company,

The Tribunals have only been comfounded on the question of "purpose" when no such letting has taken place, or where there are siginficant other assets which can mean that the letting is not the main purpose.

CTA2010 s34.

[MANHAR]

Thank you to SteLacca and bd6759 for your prompt responses.

Stelacca, although at the moment the properties are purely let, in the future the company may well look into purchases for conversions, renovations and sales. I will look further into the impact of taxation/exit strategy.

Although there may be no "clear cut" answer and it depend on interpretation of various facts I think however that bd6759's reply may be more appropriate having looked at HMRC's manual and CTA2010/S34.
This (as bd6759 said) states it will be a Close Investment Company unless throughout the accounting period it exist wholly or mainly for one or more of the following purposes:

1) the purpose of carrying on a trade on a commercial basis.
2) the purpose of making investment in land or estates or interests in land in cases where the land is, or is intended to be let to persons other than:
i) any person connected with the relative company or
ii) ... relative of an individual connected with the relevant company.


On balance, therefore as the properties are let to unrelated parties on a commercial basis I think it would on the face of it not be an Investment Company.

Thanks you both once again for your input and pointing me in the right direction.